Recent news has revealed that approximately £20 billion has been wiped off the UK’s defined benefit pension schemes over the past two days.
According to industry sources, two increases in deficits of £7 billion and £13 billion occurred over two subsequent days.
Initially, the blame was put on a 6% fall in the equity markets as traders responded to the demise of the Lehman Brothers bank but that might be simplifying the issue somewhat.
There have been a number of reasons over recent years adding to the problems suffered by company defined benefit pension schemes, not least of which is the massive losses recently suffered on world wide stock markets, but in particular the problems here in the UK.
This will be because a significant part of any investment in a UK defined benefit scheme will be in the UK stock market; however, this is not the only reason our company schemes, once the envy of the world, are looking broke.
Ever since the demise of Robert Maxwell and the subsequent discovery of the problems with the Mirror Group pension scheme, it became clear that the rules surrounding these types of pension needed to change and become a lot “tighter”.
This resulted in significant increases needed in the funding of company defined benefit pensions because they were now required to hold more money to cover the potential liabilities i.e. they had to make sure there was enough money to cover the liabilities of the members of the pension scheme.
In very simplified terms, it used to be the case that all you needed in the way of funds in a defined benefit scheme was enough to pay for those members who were retired, with a little bit more for those who were just about to retire. However, the contributions being paid by the younger members were enough to cover this on a year on year basis.
Now, quite rightly, you have to make sure there are sufficient funds invested to allow for an ageing membership of the scheme, with greater and greater numbers receiving pensions and proportionally less people paying into it. You have to allow for people transferring away from the scheme and a number of other complicated factors that require basically more money to be held by the pension fund.
This all came at a time when the recent chancellor Gordon Brown, wiped off several billion pounds a year from our pension funds in new tax charges, to line the coffers of the Treasury – very bad timing indeed!
With all these changes there has also come far greater responsibility, and indeed liability, for the trustees of these schemes to make sure everything runs as it should and the members of the pension fund are looked after appropriately.
This is why so many of our defined benefit pension schemes need to look again at what they have and decide how best to move forward – they must do this for the benefit of their members but also because THEY now have personal liabilities towards the work they carry out, and this is also a collective responsibility. It is no longer possible to say another member of the trustee team has responsibility for say investment strategy and it therefore “wasn’t my fault”, you all have responsibility together so be careful!